Thus, if the provisions of section 115 (g) are applicable at all to this case, they must relate to the redemptions effected in 1928, 1929, 1930 and 1931. As we said in Annie Watts Hill, 27 B. T. A. 73, "we must also scrutinize the redemption and distribution with respect to the time and the manner when they occur and the circumstances surrounding them at the time." Henry B. Babson, supra. Upon examination of the record we find that logically and chronologically the reasons for reducing the company's capital stock in 1928 and the following years were sound and cogent. Following the recapitalization in 1922 the demand for the company's product decreased. The development of the electric welding process was materially diminishing the use of rivets. In the spring of that year the company had been forced to reduce the price of its boiler rivets to that of structural rivets, although the production cost of the former remained higher. The contemplated erection of the Pittsburgh plant had been wholly abandoned in 1927. Due to the encroachment of electric welding upon the rivet manufacturing industry, the company was compelled to undertake the processing of electric welding rods in order to continue in business. In March, 1930, it sold land adjacent to its Cleveland plant. Thus, by reason of a diminished market, curtailed production, reduced land area (a potential plant facility), and the gradual substitution of electric welding for riveting, the company was confronted with an excess of capital which it found impossible to utilize profitably. Therefore, it proceeded to redeem and cancel portions of its outstanding stock at such times and in such amounts as business exigencies demanded. The diminution of the capital stock of the company was in harmony with the shrinkage of its own business and the lessened market demand for the product which it manufactured.

When we examine the table of dividends declared from 1913 to 1931, inclusive, we are further impressed with the lack of any purpose on the part of the petitioners and their company to distribute corporate earnings by means of an artifice in order to escape the tax. The company was a closely held corporation. From prior to March 1, 1913, to January 8, 1922, David J. Champion owned approximately one-fourth of its capital stock. From January 8, 1922, to March 14, 1925, he owned almost one-half thereof. Members of his family and intimate business associates owned practically all of the remainder. During the high tax years his company declared large dividends and he and the stockholding associates and members of his family paid their taxes thereon though such dividends had been declared from surplus rather than from operating income. Such a record is not compatible with a studied intent to avoid taxation.

A further issue is the proper basis for computing profit on the shares of stock of each petitioner upon redemption by the company. The petitioners contend that the profit should be computed according to the "first-acquired, first-sold" rule as set forth in articles 58 and 600, Regulations 74. See Towne v. McElligott, 274 Fed. 960; David Stewart, 17 B. T. A. 604. The respondent's theory is that the shares of stock transferred by David J. Champion on March 14, 1925, to D. J. Champion and M. P. Mooney, trustees, are the same shares, or their equivalent under the expanded stock issue, as those inherited by him from his wife, Rose Champion, on January 8, 1922.

The material parts of articles 58 and 600 are as follows:

ART. 58. Sale of stock and rights.-When shares of stock in a corporation are sold from lots purchased at different dates and at different prices and the identity of the lots can not be determined, the stock sold shall be charged against the earliest purchases of such stock. The excess of the amount realized on the sale over the cost or other basis of the stock will constitute gain. In the case of stock in respect of which any stock dividend was paid, the basis for determining gain or loss from a sale of a share of such stock shall be ascertained in accordance with the principles laid down in article 600.

ART. 600. Stock or securities distributed in reorganization.—

(4) Where the stock in respect of which a distribution in reorganization is made was purchased at different times and at different prices, and the stock distributed in reorganization can not be identified as having been distributed in respect of any particular lot of such stock, then any sale of the stock distributed in reorganization will be presumed to have been made from the stock distributed in respect of the earliest purchased stock.

The only question, therefore, is whether or not the 1,920 shares of preferred and the 1,920 shares of common stock of the company transferred by David J. Champion on March 14, 1925, to the trustees can be identified as having been distributed to him on December 30, 1922, in respect of the lot of 240 shares acquired by him from his wife's estate. The evidence before us demonstrates that such identification of the shares is impossible. From prior to March 1, 1913, to January 8, 1922, David J. Champion owned 240 shares of the common stock of the company. On the latter date he acquired 240 additional shares from his wife's estate. Thus, on December 18, 1922, at the time of the recapitalization, he was the actual owner of 480 shares. On December 30, 1922, pursuant to the order of the board of directors of the company entered on December 27, 1982, he exchanged his 480 shares for 3,840 shares of preferred and 3,840 shares of common stock, representing his original holdings increased by the stock dividend of 8 shares of preferred and 7 shares of common stock for each original share so exchanged. The common stock was issued to David J. Champion in five certificates, three for

1,000 shares each, one for 478 shares and one for 346 shares. The remaining shares were issued to his nominees, P. H. Mooney and W. J. Reilley, in four certificates, each nominee receiving one certificate for 7 shares and one for one share. The preferred stock was issued to Champion in four certificates, three for 1,000 shares each and one for 824 shares. The remaining shares of that stock were issued to the said nominees in two certificates of 8 shares each. From this record it is apparent that David J. Champion pooled his original stockholdings, offered them in exchange for the new issue and received certificates for the new stock in amounts that bore no relation to his original stock. It was not until more than two years later that he executed the trust assignment for the benefit of his children. In paragraph 6 of that instrument he sought to indicate the source of the bequest as being the same heritage he had received through his wife's will. But since his wife's stock had lost its identity upon the distribution of the stock dividends and the reissuance of the entire stock interests in the company on December 30, 1922, no descriptive words or acts of his could restore it. The gift to the children was equivalent in number of shares to the bequest from the wife, but they were not the same shares, nor was it possible to effect identification with the original shares.

The values to be used in recomputing the deficiencies are set out in the findings of fact.

Decision will be entered under Rule 50.

INVESTMENT TRUST OF MUTUAL INVESTMENT COMPANY, EMPIRE TRUST COMPANY, TRUSTEE, PETITIONER, v. COMMISSIONER OF INTERNAL REVenue, ResponDENT.

Docket No. 54695. Promulgated April 28, 1933.

The petitioner holds the legal title to securities belonging to many beneficiaries. At the behest of a "managing company" it makes purchases and sales of securities. The income and profits are distributed to the beneficiaries upon the order of the managing company. Held, that the petitioner is an association within the contemplation of the Revenue Act of 1928.

Herbert J. Lyall, Esq., for the petitioner.

C. A. Ray, Esq., for the respondent.

This is a proceeding for the redetermination of a deficiency in income tax for 1928 in the amount of $5,564.56. The allegation of error stated in the petition is, "the assessment of the petitioner as an association instead of its exemption as a strict trust or fiduciary."

FINDINGS OF FACT.

The petitioner is the holder of the legal title of funds belonging to certain subscribers to a so-called investment trust. It was organized April 1, 1926, under an indenture of that date by and between the Mutual Investment Company, hereinafter sometimes referred to as the "managing company" (a joint stock association formed in March, 1926, under the General Association Laws of the State of New York), as party of the first part; the Empire Trust Company, a New York corporation as party of the second part; and "all present and future registered holders" of Class A and Class B certificates issued in accordance with the provisions of the indenture and representing the holders' participation in the venture, as parties of the third part.

The purpose of the organization, as stated in the indenture, is:

to furnish a means whereby investors, especially those with limited capital may establish an Investment Fund for their own benefit and by uniting with others secure diversification of their investments, obtain the benefit of informed judgment and continuous watchfulness, receive greater security through the subordinate investment of the Managing Company in the Investment Fund and compensate the Managing Company for its investment and service only by sharing with it in those earnings of the Investment Fund which are in excess of the 6% cumulative distributions on the Class A certificates,

During 1928, the petitioner's operations were carried on in accordance with the indenture dated April 1, 1926, as amended July 8, 1926, December 31, 1926, and January 12, 1928. In this instrument the Mutual Investment Company is designated as the party to "manage, supervise and control and to invest and reinvest" the investment fund. The Empire Trust Company is designated as the trustee to "hold legal title to all cash, securities, funds and property " at any time transferred to it or conveyed to it for the account of the investment fund, subject, however, at all times to the order of the managing company, but without liability respecting the propriety of any order emanating from the managing company. The investment fund is to be composed of common and preferred stocks, bonds, etc., as determined by the managing company under certain restrictions, and the beneficiaries' interests are to be represented by Class A and Class B certificates having a face value of $100 each and $10 each, respectively.

For every $100 paid to the investment fund by those desiring to participate for which a Class A certificate shall be issued, the managing company agrees to pay $10 for which it shall be issued a Class B certificate. All certificates are to be prepared and executed by the managing company and authenticated and issued by the petitioner

and funds raised from the sale of these certificates are to be invested in securities. The managing company, through its board of di rectors, has complete discretion as to the investment and reinvestment of these funds, subject only to certain restrictions designed to afford proper diversification. It is authorized to borrow money and encumber the investment fund up to two-thirds of its market value. The expenses to be borne by the managing company and those chargeable against the investment fund are specified in the indenture. It is specifically provided that neither the certificate holders nor the officers or directors of the managing company shall be subject to any personal liability with respect to the investment fund and that the trustee shall be subject to no personal liability except for its individual gross negligence or willful neglect.

The trustee may be removed at any time by vote of the holders of 15 per cent of the outstanding Class A certificates. In the case of the resignation or removal of the trustee the successor shall be selected by the managing company, subject to a provision that the shares of any Class A certificate holder not agreeing to the amendment shall be redeemed by the managing company.

The Class A certificate holder is entitled (1) to cumulative distributions upon the face value of his certificate accruing from the date thereof at the rate of 6 per cent per annum payable quarterly, but only out of the net income derived from the investment fund as defined in the indenture, unless the board of directors of the managing company shall cause such distributions to be made out of other monies in the investment fund and, (2) to such additional pro rata distributions (on a parity with Class B shares), on the number of shares of each certificate as the board of directors of the managing company may determine, subject to the limitations provided in the indenture.

"Net income" is defined by the indenture, section I, subdivision 3, as follows:

3. The term "Net income" shall mean cash receipts and accrued interest from any loans, securities or other investments of the Investment Fund including cash dividends whether ordinary or extraordinary, but not stock dividends and not increment in principal or profit from increase in value of, or sale of, such securities or other investments, (and likewise without consideration of depreciation or losses in principal), less Fixed Expenses as hereinafter in Paragraph 4 of this Section I defined.

The Class A certificates of any holder are redeemable on the first day of any business month at the option of either the holder or the managing company. Class B certificates are issued to no one other than the managing company. Whenever Class A certificates are redeemed, but at no other time, an equal number of Class B certificates